Time Warner Cable Annual Report

Transcription

1 Time Warner Cable 2009 Annual Report

2 States Served By Time Warner Cable 14.6 Million Customer Relationships in 28 States Digital Video Digital Phone High Speed Online 47,000 Employees Commercial Services NYSE: TWC Media Sales Information as of 12/31/09 Front cover, top photo: Doug, Service Tech and Lindsay, Technical Supervisor

3 Kate, Anchor OUR MISSION Connect people and businesses with information, entertainment and each other. Give customers control in ways that are simple and easy. TIME WARNER CABLE 2009 ANNUAL REPORT 1

4 Dear Time Warner Cable Stockholders, Employees and Communities: For Time Warner Cable, 2009 was an eventful year. In March, we completed our spinoff from Time Warner Inc., becoming an independent, stand-alone company with no controlling shareholder. Like most companies, we faced the challenges of the continuing economic downturn throughout We also continued to face robust and increasing competition. Nonetheless, Time Warner Cable continued to grow in Our consistency and focus in the face of unprecedented challenges reinforced our belief that we operate in a great industry and that Time Warner Cable is a fundamentally strong company Highlights We have much to be proud of about our 2009 performance. Among our specific accomplishments in the face of challenging circumstances last year, we: Increased our total revenues 4% over 2008 to $17.9 billion Grew our commercial business revenues by more than 15% to $915 million and enhanced our commercial organization to position us for even greater growth in 2010 Glenn A. Britt Chairman, President and Chief Executive Officer 2 TIME WARNER CABLE 2009 ANNUAL REPORT

5 Our consistency and focus in the face of unprecedented challenges in 2009 reinforced our belief that we operate in a great industry and that Time Warner Cable is a fundamentally strong company. Carefully managed our operating and capital expenses and generated free cash flow of over $1.9 billion Grew primary service units (PSUs), which are total video, high-speed data and digital phone subscribers, by nearly 800,000 to 26.4 million Added 562,000 high-speed data customers and introduced our Wideband DOCSIS 3.0 broadband service Increased digital phone subscribers by nearly 12% and continued to take share away from the traditional phone companies Launched our 4G wireless broadband service, Road Runner Mobile TM Significantly increased the number of high-definition channels available to our customers (to more than 100 HD channels in many of our service areas) Expanded availability of our popular network DVR-based Start Over service to about 80% of our digital video subscribers Although our media sales business suffered from the overall advertising downturn, we re confident that advertising revenues will return to growth in 2010, in part from expected robust political ad spending in advance of the mid-term elections. On the competitive front, we continued to compete strongly against satellite TV and the traditional phone companies new video services in 2009, even as the telcos continued expanding availability of their services in our footprint. Returning Capital to Stockholders In March 2010, we paid our first quarterly cash dividend of $0.40 per share of common stock. It makes a strong statement about our confidence in our company. The dividend provides a significant yield to investors while leaving the company the flexibility to invest in organic growth and consider new business opportunities and other ways of returning capital to stockholders over time. Product Enhancements A big focus for us in 2010, as always, is to continue enhancing our products to meet our customers needs and compete effectively. Building on last year s accomplishments, our focus on A big focus for us in 2010, as always, is to continue enhancing our products to meet our customers needs and compete effectively. TIME WARNER CABLE 2009 ANNUAL REPORT 3

6 Letter To Stockholders, Employees and Communities continued enhancing and promoting our products this year will include: Adding more HD channels, putting in place capabilities to accommodate as many as 200 HD channels Expanding Start Over further and beginning to widely deploy Look Back, which extends the availability window of shows to 72 hours after they air Launching our multi-room DVR product More effectively communicating to customers the capabilities and value of our services, including the thousands of movies and other entertainment programming they can view On Demand Building on the momentum in our wireless and broadband services, making Road Runner Mobile and Wideband available to more customers in more areas Offering advanced advertising options to business customers, focusing on interactivity Our Mission As we approach the opportunities and challenges of the year ahead, the 47,000 employees of Time Warner Cable are clear about who we are as a company and what we deliver to our customers. Who we are is at the heart of our mission statement, which we formalized and introduced within the company in 2009: We connect people and businesses with information, entertainment and each other. We give customers control in ways that are simple and easy. I m proud of our employees work to make our mission more than just words. In 2009, they began implementing numerous changes, new ideas and product enhancements to bring the mission to life. An intense focus on giving our customers more control in ways that are simple and easy will guide us throughout It will be a busy year, one in which we see far more opportunities than challenges on the horizon. And with our commitment to consistency, excellent products and customer service, and a strong balance sheet, we re optimistic about the remainder of the year ahead and beyond. Thank you for your continuing support. Sincerely, Glenn A. Britt Chairman, President and Chief Executive Officer April 2010 I m proud of our employees work to make our mission more than just words. 4 TIME WARNER CABLE 2009 ANNUAL REPORT

7 Lauren, Marketing Coordinator Stephanie, Director of Marketing LIVING OUR VALUES Time Warner Cable s 47,000 employees connect with our customers, communities and each other by living our values: Excellence, Teamwork, Initiative, Innovation, Integrity, Inclusion and Community. Our workforce is driven by people with diverse experiences and perspectives. Our commitment to an inclusive workplace extends deep into the company and also encompasses a sharp focus on employee training and development, ensuring that our skills grow continually to help us better serve our customers. Time Warner Cable has been honored with numerous awards recognizing our proven commitment to training, excellence and diversity, including twice being named one of the nation s Top 50 Companies for Diversity by DiversityInc. Patrick, Customer Care Retention Representative Thomas, Technical Support Rep. Paul, Workforce Management Analyst Maria, Sales Supervisor Gaitrie, Customer Care Rep. Douglas, Customer Care Rep.

8 GIVING CUSTOMERS CONTROL Time Warner Cable takes pride in serving more than 14 million homes and nearly 300,000 businesses. Every year, we invest in our infrastructure and product development to offer customers new and enhanced services that make it simpler and easier for them to receive and share information across the globe. From access to hundreds of cable networks, community programming and enhanced viewing options like high-defi nition channels and On Demand content, to a range of Internet options tailored to their needs, Time Warner Cable customers are constantly connected to information, entertainment and each other. These screens represent some of the many channels and viewing options our customers enjoy.

9 Deana, Communications Assistant Stephen, Headend Engineering Manager Claude, Network Engineer Shaunet, Financial Analyst Dave, Headend Engineering Supervisor George, Producer/Director Tim, Lead Tech Michael, Construction Tech Jody, Network Support Tech

10 CONNECTING A MILLION MINDS Community service is in our DNA at Time Warner Cable. We have a long history of providing support in the form of cash and in-kind donations, employee volunteers and promotion for a wide range of important community causes and organizations. In 2009, after an extensive review of our philanthropic efforts, we launched a sweeping initiative to help make a greater and more lasting social impact. Through our Connect a Million Minds initiative, we have committed $100 million in cash and in-kind to encourage youth to pursue education and careers in science, technology, engineering and math. We re leveraging Time Warner Cable s resources and history as an innovation leader to help ensure our students and our country are prepared for the technological challenges of tomorrow. For more information, go to connectamillionminds.com. 8 TIME WARNER CABLE 2009 ANNUAL REPORT

11 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2009 Commission file number TIME WARNER CABLE INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) Title of each class Common Stock, par value $ Columbus Circle New York, New York (Address of principal executive offices) (Zip Code) (212) (Registrant s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Securities registered pursuant to Section 12(g) of the Act: None (I.R.S. Employer Identification No.) Name of each exchange on which registered New York Stock Exchange Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No n Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes n No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes No n Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes n No n Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. n Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Accelerated filer n Non-accelerated filer n (Do not check if a smaller reporting company) Smaller reporting company n Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes n No As of the close of business on February 10, 2010, there were 352,558,973 shares of the registrant s Common Stock outstanding. The aggregate market value of the registrant s voting and non-voting common equity securities held by non-affiliates of the registrant (based upon the closing price of such shares on the New York Stock Exchange on June 30, 2009) was approximately $11.2 billion. DOCUMENTS INCORPORATED BY REFERENCE Description of document Part of the Form 10-K Portions of the definitive Proxy Statement to be used in connection with the registrant s 2010 Annual Meeting of Stockholders Part III (Item 10 through Item 14) (Portions of Items 10 and 12 are not incorporated by reference and are provided herein)

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13 Item 1. Business. Overview PART I Time Warner Cable Inc. (together with its subsidiaries, TWC or the Company ) is the second-largest cable operator in the U.S., with technologically advanced, well-clustered systems located mainly in five geographic areas New York State (including New York City), the Carolinas, Ohio, southern California (including Los Angeles) and Texas. As of December 31, 2009, TWC served approximately 14.6 million residential and commercial customers who subscribed to one or more of its three primary subscription services video, high-speed data and voice totaling approximately 26.4 million primary service units ( PSUs ). TWC markets its services separately and in bundled packages of multiple services and features. As of December 31, 2009, 57.3% of TWC s residential and commercial customers subscribed to two or more of its primary services, including 23.7% of such customers who subscribed to all three primary services. In addition, TWC sells advertising to a variety of national, regional and local advertising customers. In February 2007, TWC became a public company subject to the requirements of the Securities Exchange Act of 1934, as amended (the Securities Exchange Act ). On March 1, 2007, TWC s Class A common stock began trading on the New York Stock Exchange. On March 12, 2009, TWC completed its separation from Time Warner Inc. ( Time Warner ), which, prior to the Separation Transactions (as defined in Recent Developments ), owned approximately 84% of the common stock of TWC (representing a 90.6% voting interest) and a 12.43% non-voting common stock interest in TW NY Cable Holding Inc. ( TW NY ), a subsidiary of TWC. As a result of the separation, Time Warner no longer has an ownership interest in TWC or TW NY. Recent Developments Separation from Time Warner, Recapitalization and TWC Reverse Stock Split On March 12, 2009, TWC s separation from Time Warner was completed pursuant to a Separation Agreement between TWC and Time Warner and certain of their subsidiaries dated as of May 20, 2008 (the Separation Agreement ). In accordance with the Separation Agreement, on February 25, 2009, a subsidiary of Time Warner transferred its 12.43% non-voting common stock interest in TW NY to TWC in exchange for 80 million newly issued shares (approximately 27 million shares after giving effect to the 1-for-3 reverse stock split discussed below) of TWC s Class A common stock (the TW NY Exchange ). On March 12, 2009, TWC paid a special cash dividend of $10.27 per share ($30.81 per share after giving effect to the 1-for-3 reverse stock split, aggregating $ billion) to holders of record on March 11, 2009 of TWC s outstanding Class A common stock and Class B common stock (the Special Dividend ). Following the payment of the Special Dividend, each outstanding share of TWC Class A common stock and TWC Class B common stock was automatically converted (the Recapitalization ) into one share of TWC common stock, par value $0.01 per share (the TWC Common Stock ). TWC s separation from Time Warner (the Separation ) was effected as a pro rata dividend of all shares of TWC Common Stock held by Time Warner to holders of record of Time Warner s common stock (the Spin-Off Dividend or the Distribution ). The TW NY Exchange, the Special Dividend, the Recapitalization, the Separation and the Distribution collectively are referred to as the Separation Transactions. In connection with the Separation Transactions, on March 12, 2009, the Company implemented a reverse stock split of the TWC Common Stock (the TWC Reverse Stock Split ) at a 1-for-3 ratio, effective immediately after the Recapitalization. The shares of TWC Common Stock distributed in the Spin-Off Dividend reflected both the Recapitalization and the TWC Reverse Stock Split Bond Offerings and Termination of Lending Commitments In 2009, TWC issued, in total, $6.5 billion in aggregate principal amount of senior unsecured notes and debentures under a shelf registration statement on Form S-3 in three underwritten public offerings. The Company used the net proceeds from these debt issuances (1) to repay all of the borrowings outstanding under a 364-day senior unsecured term loan facility (including accrued interest and commitment fees) that TWC entered into in connection with the Separation Transactions, (2) to repay all of the borrowings outstanding under its $4.0 billion five-year term loan facility, (3) to repay borrowings outstanding under the Company s senior unsecured five-year revolving credit facility and a portion of the borrowings outstanding under the Company s commercial paper program, and (4) for general corporate purposes. For more information about the 2009 Bond Offerings, see Management s Discussion and Analysis of Results of Operations and Financial Condition Overview Recent Developments 2009 Bond Offerings and Termination of Lending Commitments and Note 7 to the accompanying consolidated financial statements. Caution Concerning Forward-Looking Statements and Risk Factors This Annual Report on Form 10-K includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of These statements are based on management s current expectations and beliefs and are inherently susceptible to uncertainty and changes in circumstances. Actual results may vary materially from the expectations contained herein due 1

14 to changes in economic, business, competitive, technological, strategic and/or regulatory factors and other factors affecting the operation of TWC s business. For more detailed information about these factors, and risk factors with respect to the Company s operations, see Item 1A, Risk Factors, below and Caution Concerning Forward-Looking Statements in Management s Discussion and Analysis of Results of Operations and Financial Condition in the financial section of this report. TWC is under no obligation to, and expressly disclaims any obligation to, update or alter its forward-looking statements, whether as a result of such changes, new information, subsequent events or otherwise. Available Information and Website Although TWC and its predecessors have been in the cable business for over 40 years in various legal forms, Time Warner Cable Inc. was incorporated as a Delaware corporation on March 21, TWC s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to such reports filed with or furnished to the Securities and Exchange Commission ( SEC ) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act are available free of charge on the Company s website at as soon as reasonably practicable after such reports are electronically filed with the SEC. Services TWC offers video, high-speed data and voice services over its broadband cable systems to residential and commercial customers. Residential Services Video Services TWC offers a broad range of residential video services, including advanced services such as On-Demand, high-definition ( HD ) and digital video recorder ( DVR ) services. As of December 31, 2009, TWC had approximately 12.7 million residential video subscribers. Programming tiers. TWC currently offers three main levels or tiers of video programming Basic Service Tier ( BST ), Expanded Basic Service Tier (or Cable Programming Service Tier) ( CPST ) and Digital Basic Service Tier ( DBT ). BST generally includes broadcast television signals, satellite-delivered broadcast networks and superstations, local origination channels, a few specialty networks, such as C-SPAN and QVC, and public access, educational and government channels. CPST enables BST subscribers to add to their service national, regional and local cable news, entertainment and other networks, such as CNN, USA and ESPN. In certain areas, BST and CPST also include proprietary local programming devoted to the communities TWC serves, including 24-hour local news channels in a number of cities. DBT enables subscribers who receive digital video signals ( digital video subscribers ) to receive additional cable networks. Generally, subscribers to any tier of video programming can purchase genre-based programming tiers, such as movies, sports and Spanish language tiers, and premium services, such as HBO and Showtime. TWC s video subscribers pay a fixed monthly fee based on the video programming tier they receive. Subscribers to specialized tiers and premium services are charged an additional monthly fee, with discounts generally available for the purchase of packages of more than one such service. HD simulcasts (i.e., HD channels that are the same as their standard-definition counterparts but for picture quality) are generally provided at no additional charge, and additional charges generally apply only for HD channels that do not have standard-definition counterparts. The rates TWC can charge for its BST service and certain video equipment, including set-top boxes, in areas not subject to effective competition are subject to regulation under federal law. See Regulatory Matters below. On-Demand services. On-Demand services are generally available to digital video subscribers. Available On-Demand services include a wide selection of featured movies and special events, for which separate per-use fees are generally charged, and free access to selected movies, programming from broadcast stations and cable networks, music videos, local programming and other content. In addition, premium service (e.g., HBO) subscribers generally have access to the premium service s On-Demand content without additional fees. DVR service. Set-top boxes equipped with DVRs enable customers, among other things, to pause and/or rewind live television programs and record programs on the hard drive built into the set-top box. Subscribers pay an additional monthly fee for TWC s DVR service. As of December 31, 2009, 50%, or approximately 4.4 million, of TWC s digital video subscribers also subscribed to its DVR service. In 2010, TWC expects to introduce remote DVR management, which will allow customers to program their DVRs via a website or mobile handset, and a multi-room DVR service, which will allow a program recorded on a DVR to be watched on any television with a TWC-provided set-top box in a customer s home. Network DVR services. TWC is expanding the use of Video On-Demand ( VOD ) technology to introduce additional enhancements to the video experience. For instance, as of December 31, 2009, Start Over TM, TWC s Emmy-award winning technology, was available to 79%, or approximately 7.0 million, of TWC s digital video subscribers. Start Over allows digital video subscribers using a TWC-provided set-top box to restart select in progress programs directly from the relevant channel, without the ability to fast-forward through commercials. TWC has begun rolling out other Network DVR services such as Look Back TM, which 2

15 extends the window for viewing a program to 72 hours after it has aired, and Quick Clips TM, which allows customers to view short-form content tied to the broadcast station or cable network then being watched. High-speed Data Services TWC offered residential high-speed data services to nearly all of its homes passed as of December 31, TWC s high-speed data services provide customers with a fast, always-on connection to the Internet. High-speed data subscribers connect to TWC s cable systems using a cable modem, which TWC provides at no charge or which subscribers can purchase on their own. Subscribers pay a fixed monthly fee based on the level of service received. As of December 31, 2009, TWC served approximately 9.0 million residential high-speed data subscribers. Road Runner High-Speed Online TM. TWC offers four tiers of Road Runner High-Speed Online service in all of its systems: Turbo TM, Standard, Basic and Lite. Each tier offers a different speed at a different monthly fee. Turbo generally offers subscribers speeds of up to 20 Mbps downstream and 2 Mbps upstream. In addition, in the majority of its systems, TWC provides Turbo and Standard subscribers with Powerboost TM at no additional charge, which allows users to initiate brief download speed bursts when TWC s network capacity permits. During 2009, TWC deployed a new Wideband service in New York City, and expects to continue to selectively deploy Wideband in its service areas during Wideband generally offers subscribers speeds of up to 50 Mbps downstream and 5 Mbps upstream. TWC s Road Runner High-Speed Online service provides communication tools and personalized services, including , PC security, parental controls and online radio, without any additional charge. The Roadrunner.com portal provides access to content and media from local, national and international providers and topic-specific channels, including entertainment, dating, games, news, sports, travel, music, movie listings, shopping, ticketing and coupon sites. In addition to Road Runner High-Speed Online, most of TWC s cable systems provide their high-speed data subscribers with access to the services of certain other on-line providers, including Earthlink. Road Runner Mobile TM. During the fourth quarter of 2009, TWC launched Road Runner Mobile, a wireless mobile broadband service, in several cities. Road Runner Mobile provides customers with wireless broadband Internet access on their computers via a TWC-provided data card. TWC offers service delivered over Clearwire Corporation s ( Clearwire ) fourth-generation ( 4G ) WiMax network and Sprint Corporation s ( Sprint ) third-generation ( 3G ) CDMA network. In 2010, TWC expects to continue to roll out Road Runner Mobile in additional cities. TWC is also an equity investor in Clearwire, see Operating Partnerships, Joint Ventures and Significant Investments below. Voice Services TWC offered its Digital Phone service to nearly all of its homes passed as of December 31, Most Digital Phone customers receive unlimited local, in-state and U.S., Canada and Puerto Rico calling and a number of calling features, including call waiting, caller ID and Enhanced 911 ( E911 ) services, for a fixed monthly fee. TWC also offers additional calling plans with a variety of options that are designed to meet customers particular needs, including a local-only calling plan, an unlimited in-state calling plan and an international calling plan. As of December 31, 2009, TWC served approximately 4.2 million residential Digital Phone subscribers. In 2010, TWC expects to launch a residential web portal, which will allow Digital Phone subscribers to use the Internet to customize their Digital Phone features and listen to their voic . Commercial Services TWC offers video, high-speed data, voice, networking and transport services to commercial customers marketed under the Time Warner Cable Business Class brand. Video Services TWC offers small- and medium-sized businesses a full range of video programming tiers and music services. Packages are designed with a wide variety of options to meet the specific demands of a business environment, with access to entertainment and news programming covering world events, local news, weather and financial markets. Commercial subscribers are charged a fixed rate based on their tier of service. As of December 31, 2009, TWC served 160,000 commercial video subscribers. High-speed Data, Networking and Transport Services TWC offers commercial customers a variety of high-speed data, networking and transport services. High-speed data service. TWC provides high-speed data service to small businesses with speeds of up to 15 Mbps downstream and up to 2 Mbps upstream and, in New York City, up to 50 Mbps downstream and up to 5 Mbps upstream with Wideband ( Shared Internet Access ). TWC also provides dedicated access to small- and medium-sized businesses through a fiber connection to the Internet 3

16 ( Dedicated Internet Access ). The downstream and upstream speeds for Dedicated Internet Access service are generally up to 1 Gbps. Customers may add to their Shared Internet Access or Dedicated Internet Access certain additional services, including managed storage, web hosting and personal and managed data security. In addition, TWC expects to begin offering its wireless mobile broadband service, Time Warner Cable Business Class Mobile, to commercial customers in certain of its service areas during Commercial subscribers pay a fixed monthly fee based on the services received. Due to their different characteristics, commercial subscribers are charged at different rates than residential subscribers. As of December 31, 2009, TWC had 295,000 commercial high-speed data subscribers. Commercial networking and transport services. TWC offers Metro Ethernet service that provides high capacity connections to the Internet for commercial customers with geographically dispersed locations with speeds ranging from up to sub-t1 to up to 10 Gbps. TWC s Metro Ethernet service can also extend the reach of the customer s local area network or LAN within and between metropolitan areas. In addition, TWC offers point-to-point transport services to wireless telephone providers, Internet services providers and competitive carriers on a wholesale basis. Voice Services TWC offers its commercial voice service, Business Class Phone, to a broad range of businesses. Business Class Phone is a multi-line voice service developed for small businesses, which provides unlimited local, intrastate and long distance calling, along with other key business features, such as call restrictions, non-verified account codes and three-way call transfer. During 2009, TWC also began offering Business Class PRI, which is designed for medium-sized businesses and supports up to twenty-three simultaneous voice calls on each two-way trunk line. Due to their different characteristics, commercial Business Class Phone subscribers are charged at different rates than residential Digital Phone subscribers. At December 31, 2009, TWC had 67,000 commercial voice subscribers. Advertising TWC earns revenues by selling advertising to national, regional and local customers. As part of the agreements under which it acquires video programming, TWC typically receives an allocation of scheduled advertising time in such programming, generally two or three minutes per hour, into which its systems can insert commercials, subject, in some instances, to certain subject matter limitations. The clustering of TWC s systems expands the share of viewers that TWC reaches within a local designated market area, which helps its local advertising sales business to compete more effectively with broadcast and other media. In addition, TWC has a strong presence in the country s two largest advertising market areas, New York, NY, and Los Angeles, CA. In many locations, TWC has formed advertising interconnects or entered into representation agreements with contiguous cable system operators to deliver locally inserted commercials across wider geographic areas, replicating the reach of the local broadcast stations as much as possible. TWC also sells the video advertising inventory of certain regional sports programming networks. In addition, TWC s local cable news channels, VOD offerings and online services, such as Roadrunner.com, provide it with opportunities to generate advertising revenue. Advanced Advertising TWC is exploring various means to use its VOD and other advanced capabilities to deliver to television advertisers the same kind of advanced advertising offerings and measurement data currently available to Internet advertisers, as well as to attract advertising that would otherwise be placed with other media, such as print and direct mail. For example, in several geographic areas, TWC provides overlays that enable video subscribers with a TWC-provided digital set-top box to request additional information regarding certain advertised products using the remote control, to telescope from a traditional advertisement to a long-form VOD segment regarding the advertised product, to vote on a relevant topic or to receive more specific additional information. In addition, in 2009, TWC launched certain digital offerings, such as Promotions on Demand, which enable video subscribers to use their remote control to request that coupons, samples and/or brochures be sent to their home. These tools are used to provide advertisers with important feedback about the impact of their advertising efforts and the value of enhancing the video experience with interactive features. TWC also currently provides anonymized VOD and enhanced TV viewing data to its programming partners. In 2008, TWC and certain other cable operators formed Canoe Ventures LLC ( Canoe ), a joint venture focused on developing a common technology platform among cable operators for the delivery of advanced advertising products and services to be offered to programmers and advertisers. One component of Canoe s strategy is to enable TWC and the industry as a whole to expand their measurement capabilities in order to provide anonymized viewing data to marketers and strategic partners to serve as the foundation of its advanced advertising platform. 4

17 Marketing and Sales TWC s marketing focuses both on acquiring new customers as well as retaining and selling additional services to existing customers. In both cases, offering attractive bundled services, particularly a triple play offering of video, high-speed data and voice services, is a key element of TWC s strategy. TWC offers bundled services to both its residential and commercial customers and, increasingly, these customers subscribe to two or three of TWC s primary services. TWC believes that bundled offerings increase its customers satisfaction with TWC, increase customer retention and encourage subscription to additional features. Using a proprietary system, TWC is able to segment existing and potential customers, and target its marketing efforts appropriately. The following table presents selected statistical data regarding TWC s customer relationships and double play and triple play subscribers (in thousands): December 31, Customer relationships (a)... 14,572 14,582 14,626 Double play (b)... 4,900 4,794 4,703 Double play penetration (c) % 32.9% 32.1% Triple play (d)... 3,448 3,099 2,363 Triple play penetration (e) % 21.2% 16.2% (a) (b) (c) (d) (e) Customer relationships represent the number of subscribers who receive at least one level of the Company s primary services, encompassing video, high-speed data and voice services (including circuit-switched telephone service, as applicable). For example, a subscriber who purchases only high-speed data service and no video service will count as one customer relationship, and a subscriber who purchases both video and high-speed data services will also count as only one customer relationship. Double play subscriber numbers reflect TWC customers who subscribe to two of TWC s primary services. Double play penetration represents double play subscribers as a percentage of customer relationships. Triple play subscriber numbers reflect TWC customers who subscribe to all three of TWC s primary services. Triple play penetration represents triple play subscribers as a percentage of customer relationships. TWC is in the fourth year of using the brand, The Power of You TM, to advertise a variety of features, such as Start Over, that demonstrate that TWC customers are in control of their experience. This message is delivered via broadcast, TWC s website, its cable systems, print, radio and other outlets including outdoor advertising, direct mail, , on-line advertising, local grassroots efforts and non-traditional media. TWC also employs a wide range of direct channels to reach its customers, including outbound telemarketing, door-to-door sales, online at and through third-party web partners, and in TWC and third-party retail stores. In addition, TWC uses customer care channels and inbound call centers to sell additional services to existing customers, as well as new services to potential customers. Customer Care During 2009, TWC made significant progress in improving its customer care processes and infrastructure. The Company s customer care strategy is designed to give customers more control over their experience in ways that are simple and easy and, to that end, is focused on the reliability and technical quality of its plant, resolving customers issues on the first call, and providing customers several means of communicating with the Company, including online approaches, such as ecare and MyService at Cable Systems Technology TWC s cable systems employ a hybrid fiber coaxial cable, or HFC, network. TWC transmits signals on these systems via laser-fed fiber optic cable from origination points known as headends and hubs to a group of distribution nodes, and uses coaxial cable to deliver these signals from the individual nodes to the homes they serve. TWC pioneered this architecture and received an Emmy award in 1994 for its HFC development efforts. HFC architecture allows the delivery of two-way video and broadband transmissions, which is essential to providing advanced video, high-speed data, voice, networking and transport services. As of December 31, 2009, virtually all of the homes passed by TWC s cable systems were served by two-way capable plant that had been upgraded to provide at least 750MHz of capacity. TWC believes that its network architecture is sufficiently flexible and extensible to support its current requirements. However, in order for TWC to continue to innovate and deliver new services to its customers, as well as meet its competitive needs, TWC anticipates that it will need to use the bandwidth available to its systems more efficiently over the next few years. To accommodate increasing demands for greater capacity in its network, TWC has deployed a technology known as switched digital video ( SDV ). SDV technology expands network capacity by transmitting only those digital and HD video channels that are being watched within a given grouping of 5

18 households at any given moment. Since it is generally the case that not all such channels are being watched at all times within a given group of households, SDV technology frees up capacity that can then be made available for other uses, including additional HD channels, expanded VOD offerings, faster high-speed data connections, reliable Digital Phone quality and interactive services. TWC received an Emmy award in 2008 for its efforts in SDV technology development. As of December 31, 2009, approximately 5.9 million (or 46%) of video subscribers received some portion of their video service via SDV technology, and TWC expects to complete its roll-out of SDV technology during Set-top Boxes Each of TWC s cable systems uses one of two conditional access systems to secure signals from unauthorized receipt, the intellectual property rights to which are controlled by set-top box manufacturers. In part as a result of the proprietary nature of these conditional access systems, TWC currently purchases set-top boxes from a limited number of suppliers. For more information, see Risk Factors Risks Related to Dependence on Third Parties TWC may not be able to obtain necessary hardware, software and operational support. Generally, TWC s video subscribers must have either a TWC-provided digital set-top box or a digital cable-ready television or similar device equipped with a conditional-access security card ( CableCARD TM ) in order to receive digital video programming. However, a unidirectional device, such as a digital cable-ready television, cannot request certain digital signals that are necessary to receive TWC s two-way video services, such as VOD, channels delivered via SDV technology and TWC s interactive program guide. In order to receive TWC s two-way video services, customers generally must have a TWC-provided digital set-top box. CableLabs, a nonprofit research and development consortium founded by members of the cable industry, has put forward a set of hardware and software specifications known as tru2way, which represent an effort to create a common platform for set-top box applications regardless of the box s operating system. Tru2way-enabled televisions and other devices with tru2way technology are able to receive TWC s two-way video services. During 2009, TWC deployed approximately 2.3 million tru2way-enabled set-top boxes, and it expects to continue to deploy additional boxes during Suppliers TWC contracts with certain third parties for goods and services related to the delivery of its video, high-speed data and voice services. Video programming. TWC carries local broadcast stations pursuant to either the Federal Communications Commission (the FCC ) must carry rules or a written retransmission consent agreement with the relevant station owner. The current three-year carriage cycle began on January 1, 2009, and TWC has multi-year retransmission consent agreements in place with most of the retransmission consent stations that it carries. For more information, see Regulatory Matters below. Cable networks, including premium services, are carried pursuant to affiliation agreements. TWC generally pays a monthly per subscriber fee for cable services and sometimes pays a fee for broadcast stations that elect retransmission consent. Such fees typically cover the network or station s linear feed as well as its free On-Demand content. Payments to the providers of some premium services may be based on a percentage of TWC s gross receipts from subscriptions to the services. Generally, TWC obtains rights to carry VOD movies and events and to sell and/or rent online video programming via the Road Runner Video Store through in Demand L.L.C., a company in which TWC holds a minority interest. In some instances, TWC contracts directly with film studios for VOD carriage rights for movies. Such VOD content is generally provided to TWC under revenue-sharing arrangements. Set-top boxes, program guides and network equipment. TWC purchases set-top boxes and CableCARDs from a limited number of suppliers, including Cisco Systems Inc. ( Cisco Systems ), Motorola Inc. and Samsung Electronics Co., Ltd. and leases these devices to subscribers at monthly rates. See Technology Cable Systems Set-top Boxes above and Regulatory Matters below. TWC purchases routers, switches and other network equipment from a variety of providers, the most significant of which is Cisco Systems. See Risk Factors Risks Related to Dependence on Third Parties TWC may not be able to obtain necessary hardware, software and operational support. In addition to its Open Cable Digital Navigator ( ODN ) and Mystro Digital Navigator ( MDN ) program guides, TWC provides its subscribers with set-top box program guides from Cisco Systems and Rovi Corporation (formerly Macrovision Corporation). High-speed data and voice connectivity. TWC delivers high-speed data and voice services through TWC s HFC network and regional and national fiber networks that are either owned or leased from third parties. These networks provide connectivity to the Internet. TWC pays fees for leased circuits based on the amount of capacity available to it and pays for Internet connectivity based on the amount of IP-based traffic received from and sent over the other carrier s network. TWC also has entered into a number of settlement-free peering arrangements with third-party networks that allow TWC to exchange traffic with those networks without a fee. Digital Phone. Under multi-year agreements between TWC and Sprint, Sprint assists TWC in providing Digital Phone service by routing voice traffic to and from destinations outside of TWC s network via the public switched telephone network, delivering E911, operator and directory assistance services and assisting in order processing, local number portability and long-distance traffic carriage. In 6

19 2009, TWC launched an initiative to replace Sprint as the provider of these services, a process that will take a number of years. See Risk Factors Risks Related to Dependence on Third Parties TWC may not be able to obtain necessary hardware, software and operational support. Competition TWC faces intense competition for customers from a variety of alternative communications, information and entertainment delivery sources. TWC competes with incumbent local telephone companies, including AT&T Inc. ( AT&T ) and Verizon Communications Inc. ( Verizon ), across each of its primary services. Some of these telephone companies offer a broad range of services with features and functions comparable to those provided by TWC and in bundles similar to those offered by TWC, sometimes with the addition of wireless services. Each of TWC s services also faces competition from other companies that provide services on a stand-alone basis. TWC s video service faces competition from direct broadcast satellite ( DBS ) services, and increasingly from companies that deliver content to consumers over the Internet. TWC s high-speed data service faces competition from wireless data providers, and competition in voice service is increasing as more homes in the United States are replacing their wireline telephone service with wireless service. Technological advances and product innovations have increased and will likely continue to increase the number of alternatives available to TWC s customers, further intensifying competition. See Risk Factors Risks Related to Competition. Principal Competitors Incumbent local telephone companies. TWC s video, high-speed data and Digital Phone services face competition from the video, digital subscriber line ( DSL ), wireless broadband and wireline and wireless phone offerings of AT&T and Verizon. In a significant number of TWC s operating areas, AT&T and Verizon have upgraded their networks to carry two-way video, high-speed data and IP-based telephony services, each of which is similar to the corresponding service offered by TWC. Moreover, AT&T and Verizon aggressively market and sell bundles of video, high-speed data and voice services plus, in some cases, wireless services, and they market cross-platform features with their wireless services, such as remote DVR control from a wireless handset. TWC also faces competition in some areas from the DSL, wireless broadband and phone offerings of smaller incumbent local telephone companies, such as Frontier Communications Corporation ( Frontier Communications ) and Cincinnati Bell, Inc. ( Cincinnati Bell ). Direct broadcast satellite. TWC s video service faces competition from DBS services, such as DISH Network Corporation ( Dish Network ) and DirecTV Group Inc. ( DirecTV ). Dish Network and DirecTV offer satellite-delivered pre-packaged programming services that can be received by relatively small and inexpensive receiving dishes. These providers offer aggressive promotional pricing, exclusive programming (e.g., NFL Sunday Ticket TM ) and video services that are comparable in many respects to TWC s digital video service, including its DVR service and some of its interactive programming features. In some areas, incumbent local telephone companies and DBS operators have entered into co-marketing arrangements that allow the telephone companies to offer synthetic bundles (i.e., video service provided principally by the DBS operator, and DSL, wireline phone service and, in some cases, wireless service provided by the telephone company). From a consumer standpoint, the synthetic bundles appear similar to TWC s bundles. Cable overbuilders. TWC operates its cable systems under non-exclusive franchises granted by state or local authorities. The existence of more than one cable system, including municipality-owned systems, operating in the same territory is referred to as an overbuild. In some of TWC s operating areas, other operators have overbuilt TWC s systems and offer video, high-speed data and voice services in competition with TWC. Other Competition and Competitive Factors Aside from competing with the video, high-speed data and voice services offered by incumbent local telephone companies, DBS providers and cable overbuilders, each of TWC s services also faces competition from other companies that provide services on a stand-alone basis. Video competition. TWC s video service faces competition from a number of different sources, including companies that deliver movies, television shows and other video programming over broadband Internet connections, such as Hulu.com, Apple Inc. s itunes, Netflix Inc. s Watch Instantly and YouTube. Increasingly, content owners are utilizing Internet-based delivery of content directly to consumers, some without charging a fee for access to the content. Furthermore, due to consumer electronics innovations, consumers are able to watch such Internet-delivered content on television sets. TWC also competes with online order services with mail delivery and video stores. Online competition. TWC s high-speed data service faces competition from a variety of companies that offer other forms of online services, including low cost dial-up services over telephone lines and wireless broadband services, such as those offered by Verizon, AT&T, Sprint, T-Mobile USA, Inc. and Clearwire, Internet service via power lines, satellite and various other wireless services (e.g., Wi-Fi). 7

20 Digital Phone competition. TWC s Digital Phone service competes with wireline, wireless and over-the-top phone providers. An increasing number of homes in the U.S. are replacing their traditional wireline telephone service with wireless phone service, a trend commonly referred to as wireless substitution. Wireless phone providers are encouraging this trend with aggressive marketing and the launch of wireless products targeted for home use. TWC also competes with over-the-top providers, such as Vonage, Skype, magicjack and Google Voice, and companies that sell phone cards at a cost per minute for both national and international service. The increase in wireless substitution and in the number of different technologies capable of carrying voice services has intensified the competitive environment in which TWC operates its Digital Phone service. Additional competition. In addition to multi-channel video providers, cable systems compete with all other sources of news, information and entertainment, including over-the-air television broadcast reception, live events, movie theaters and the Internet. In general, TWC also faces competition from other media for advertising dollars. To the extent that TWC s services converge with theirs, TWC competes with the manufacturers of consumer electronics products. For instance, TWC s DVR service competes with similar devices manufactured by consumer electronics companies. Commercial competition. TWC competes with incumbent local telephone companies, especially AT&T and Verizon, across all of its commercial services: video, high-speed data, voice, networking and transport. In addition, on a stand-alone basis, TWC s commercial video service faces competition from DBS providers that compete with TWC primarily in the hospitality and restaurant industry, and its commercial high-speed data, voice, networking and transport services face competition from national and smaller regional competitive local exchange carriers or, CLECs, and from a variety of smaller incumbent local telephone companies, such as Frontier Communications and Cincinnati Bell. Franchise process. Under the Cable Television Consumer Protection and Competition Act of 1992, franchising authorities are prohibited from unreasonably refusing to award additional franchises. In December 2006, the FCC adopted an order intended to make it easier for competitors to obtain franchises, by defining when the actions of county- and municipal-level franchising authorities will be deemed to be unreasonable as part of the franchising process. Furthermore, legislation supported by regional telephone companies has been enacted in a number of states to allow these companies to enter the video distribution business under state-wide franchises and without obtaining local franchise approval. Legislation of this kind has been enacted in California, Kansas, Missouri, North Carolina, Ohio, South Carolina, Texas and Wisconsin, which include some of the Company s largest operating areas. See Regulatory Matters Video Services Franchising and Risk Factors Risks Related to Government Regulation. Employees As of December 31, 2009, TWC had approximately 47,000 employees, including approximately 1,400 part-time employees. 4.6% of TWC s employees are represented by labor unions. TWC considers its relations with its employees to be good. Regulatory Matters TWC s business is subject, in part, to regulation by the FCC and by most local and state governments where TWC has cable systems. In addition, TWC s business is operated subject to compliance with the terms of the Memorandum Opinion and Order issued by the FCC in July 2006 in connection with the regulatory clearance of the transactions related to TWC s 2006 acquisition of cable systems from Adelphia Communications Corporation and Comcast Corporation (the Adelphia/Comcast Transactions Order ). Various legislative and regulatory proposals under consideration from time to time by the United States Congress ( Congress ) and various federal agencies have in the past materially affected TWC and may do so in the future. The Communications Act of 1934, as amended (the Communications Act ), and the regulations and policies of the FCC affect significant aspects of TWC s cable system operations, including video subscriber rates; carriage of broadcast television signals and cable programming, as well as the way TWC sells its program packages to subscribers; the use of cable systems by franchising authorities and other third parties; cable system ownership; offering of voice, high-speed data and transport services; and its use of utility poles and conduits. The following is a summary of current significant federal, state and local laws and regulations affecting the growth and operation of TWC s business as well as a summary of the terms of the Adelphia/Comcast Transactions Order. The summary of the Adelphia/Comcast Transactions Order herein does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the provisions of the Adelphia/Comcast Transactions Order. Video Services Subscriber rates. The Communications Act and the FCC s rules regulate rates for basic cable service and equipment in communities that are not subject to effective competition, as defined by federal law. Where there has been no finding by the FCC of effective competition, federal law authorizes franchising authorities to regulate the monthly rates charged by the operator for the minimum level of video programming service, referred to as basic service tier or BST, which generally includes broadcast television 8